Windfall tax’s final stages: bill to be debated in Parliament
Parliamentary deputies are currently discussing the proposal to introduce a tax on windfall profits (windfall tax) for selected taxpayers in the fossil fuel and energy sectors and for banks. The tax should apply between 2023 and 2025. Excess profits are defined as the general income tax base exceeding the average of tax bases or tax losses for taxable periods beginning and ending between 1 January 2018 and 31 December 2021, plus 20%. The tax base so determined would be subject to an additional tax of 60%.
Taxpayers and taxable period
The payer of this tax will generally be a payer of corporate income tax generating income qualifying for the windfall tax of at least CZK 50 million in a taxable period falling at least partially within the windfall tax application period (2023-2025). Under these general preconditions, the bill defines three categories of taxpayers.
The first category consists of taxpayers who have income from the activities stated below, provided that the income qualifying for the windfall tax from those activities for the first accounting period ending on or after 1 January 2021 accounted for at least 25% of their annual total net turnover.
- mining of hard coal
- extraction of crude petroleum and natural gas
- production of coke oven products
- manufacture of refined petroleum products.
The second category comprises taxpayers generating income from the following activities:
- production, transmission, and distribution of electricity except for the combined production of electricity and heat in a ratio of electricity produced to heat supplied of less than 4.4
- gas production; distribution of gaseous fuels through networks
- wholesale of liquid fuels and related products
- wholesale of gaseous fuels and related products
- transportation by oil pipeline
- transportation by gas pipeline.
For this category, in addition to meeting the general preconditions above, in the windfall tax application period the taxpayer will have to be part of a corporate group (with the sum of the relevant income of all taxpayers within the group for the first accounting period ending on or after 1 January 2021 of at least CZK 2 billion) or record income qualifying for the windfall tax of at least CZK 2 billion for the first accounting period ending on or after 1 January 2021.
The third category of taxpayers are banks, namely those whose net interest income (the income qualifying for the windfall tax) for the first accounting period ending on or after 1 January 2021 exceeds CZK 6 billion while meeting the general precondition of having generated net interest income for the relevant taxable period of at least CZK 50 million.
Tax base and rate
The tax base for windfall profits is based on the general corporate income tax base and determined as the difference between the reference and comparative tax bases. The reference tax base is the tax base for the current taxable period or part thereof falling within the 2023 to 2025 period before applying deductible items and after excluding foreign income and related expenses. The comparative tax base is the average of the tax bases and tax losses (again excluding the effect of deductible items and foreign income) for taxable periods beginning on or after 1 January 2018 and ending on or before 31 December 2021, plus an absolute value of 20% of that base or loss.
The tax rate is proposed at 60%. This tax would be applied on top of the statutory corporate income tax (19% on the entire tax base).
Windfall tax prepayments shall be made already in the second half of 2023 based on the fictive tax reported to the tax administrator for the last taxable period ending before 1 January 2023 (i.e., for the 2022 taxable period, for example). In this report, the taxpayer shall include information they would have recorded in their windfall tax return and shall use this information to determine the amount and frequency of prepayments. This report must be submitted by 3 July 2023 at the latest. After filing the first tax return (i.e., for 2023, for example), prepayments shall be determined based on the last known tax liability.
The proposal to introduce a windfall tax will be discussed by the deputies in the final third reading on 4 November 2022. A vote will also be taken on any amending proposals tabled so far. An amending proposal that would have moved forward the application of the tax to 2022 was not included after all. The amending proposals submitted include, inter alia, a proposal to reduce the limit on qualifying net interest income for banks to CZK 2 or 3 billion; a reduction in the tax rate to 40% for 2024 and 2025; a condition that the group's qualifying income must be at least 50% of the turnover of the first category of taxpayers; and the exclusion of commodity traders from the scope of this tax. After its approval by the chamber of deputies, the bill will be discussed by the senate.
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